The Chinese bank says it is following clients into Brazil, and
analysts have been predicting further Latin American banking
operations by Chinese banks since
ICBC announced it was buying Standard Banks Argentina
operations in August 2011. Chinese banks are keen for
international diversification, and the resource-rich region
offers attractive options.

ICBCs acquisition of Standard Banks Argentine
operations for $600 million and a capital injection of $100
million took more than a year to be approved. A source close to
the transaction said that the Argentine government wanted to
influence the appointment process for the new CEO. In June,
Argentinas economy ministry announced a $2.1 billion loan
from accords with Chinese banks. The delayed process was
finally approved in November.

Wave of concentration

When ICBCs Argentine acquisition was announced there
was an expectation that there would be a wave of consolidation
in the banking sector. However, to date there has been little
activity, despite very low valuations, with the only notable
exception being Banco de Servicios y Transacciones
acquisition of consumer-finance oriented Banco Cetelem
Argentina.

Maria Valeria Azconegui, analyst at Moodys Financial
Institutions Group, was one who thought there might have been
some more M&A activity in Argentine banking in the past
year. I thought we might see some concentration,
says Azconegui. But the big question is: who would
buy?

Azconegui says the banking system faces substantial
regulatory and political risk. Moodys has a negative
outlook for the countrys banking system because of the
worsening operating environment and the negative impact of new
banking rules.

One of the most important is the rule that requires the top
30 banks to
issue loans to SMEs at below market rates. These loans,
which typically have terms of three years  a tenor one
banker called science fiction for the country,
given the extremely short-term deposit basis of the system, are
set at around 15%, about half the commercial rate charged by
banks to this sector. Despite effectively being forced to offer
subsidized rates, there are problems finding enough clients to
issue the loans to, given the small size of the sector compared
with the regulatory targets.

The universe of SMEs is really limited, says
Azconegui, who notes that at first banks tried to limit losses
by linking loans to payroll services and other cross-selling
initiatives. But because of competition to satisfy regulatory
targets, banks began to lower their lending discipline to
comply, despite the government extending the definition of
SMEs. Banks that fail to comply face fines, but the real risk
is political. Unfortunately the central bank is not
independent and [no bank] wants to be on its grey or black
list, so they try to comply, says Azconegui.

The central bank is also capping the fees that the banks can
charge, which Azconegui says is likely to have the greatest
impact on the consumer-oriented banks.

System-wide, the impairment loan ratio is still low,
though it is increasing, but the most risky segment is the
consumer finance banks, which have NPLs of between 15% and
18%, she says. Part of this segment will be in a
little more trouble because unemployment is rising a little
bit. The past fee rate enabled the consumer finance banks to
capture the NPL risk [in aggregate], but going forward the
capped rate wont be able to cover this rate.

Capital retained

However, the countrys banks are very well capitalized
because of central bank rules that prevent financial
institutions paying dividends unless they have tier 1 capital
of more than 75% of the minimum rate (which is 8%, but with
operational risk regulations is nearer to 9%). Even the leading
banks such as Banco Macro dont exceed this higher
threshold, and so the big banks are retaining capital.
You see many of the big banks investing in corporate
buildings to hedge against inflation and make better use of
excessive capital, says Azconegui, who believes that the
foreign banks view Argentina as a long-term investment.

The introduction of a capital markets law has also unnerved
businesses. One of the new powers related to minority
shareholders  although untested  appears to give
any minority shareholder the ability to take over for six
months any company that it believes is being misled by the
current management.

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